Price Wise: Managing oil price risk in resin prices

11/30/2011

All resin prices contain crude oil price risk, but for propylene and derivatives, the extent of oil price risk (i.e. the price correlation) is over 90%, as you would expect if you looked at any upstream/downstream process chart with the monomers only a few refining steps removed from crude oil itself.

Interestingly, even resins with a less direct linkage in the production chain have a high oil price correlation, as shown here for high-impact polystyrene:

HIPS prices courtesy of Petrochem Wire
Crude oil feeds refineries, refineries feed petrochemical plants, and petrochemical plants produce resins. All resins market price surveys (PCW, CDI, Chem Orbis, etc.) keep a watchful eye on crude oil prices as they do their best to report fair and accurate resin market prices. But which crude oil benchmark best represents oil prices and, therefore, is the one resins buyers and sellers should watch most closely - Brent or WTI? More important, once deciding the best benchmark, how may processors manage their oil-based resins price risk? Are transactions in the scary futures market the only way? A couple of recent articles in the Wall St. Journal shed light on these questions....
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